The Actuaries Institute has cautioned retirees against a knee-jerk reaction to the Government’s changes Age Pension asset test changes.
The Actuaries Institute Superannuation Projections and Disclosure (SPD) sub-committee warned retirees destined to live to a ripe old age should think twice before accepting some of the advice recently aired on seeking to maintain their pension in the face of changes to the assets test.
The institute says the concern of retirees is understandable in circumstances where from 1 January, next year, the Age Pension reduces by $78 per year for each $1,000 of non-home assets over certain thresholds.
It said that, at first glance, this made it appear that retirees would have to earn over 7.8 per cent on the extra $1,000 or that they would be better off without the extra $1,000 of assets, but noted that such perceptions ignored the fact that a partial Age Pension entitlement generally increased throughout retirement as assets reduced.
The Actuaries Institute has provided a case-study covering the circumstances likely to be encountered by retirees and cautioned that such tasks could not be properly addressed through conclusions based upon calculations of a retiree’s first year Age Pension and allocated pension income entitlements.
It said the interaction of the many pieces of Australia’s retirement income system was complex and included assets and income test rules for the pension, minimum superannuation assets withdrawal requirements, and the interaction of other factors such as inflation and investment returns.
“Any conclusions based on only considering the income generated in the first year after retirement are liable to be incorrect,” the institute said.
“Only the output of a year-by-year projection can clearly show how these factors interact throughout a person’s retirement.”
“Retirees must make decisions about spending capital over time. Ideally, these should allow for a sensible assessment of future cash flow. Year-by- year projections throughout retirement are vital to capture the dynamic nature of the Age Pension rules as asset values change. However, this is just the start. Given each retiree has an unknown lifespan and faces unknown investment returns, people have valid concerns about outliving their capital,” the institute said.
